Can I have a SIPP and a workplace pension?

SIPPs (Self Invested Personal Pensions) and workplace pensions are types of tax-wrapping pensions you use to save for retirement. If you’re new to the world of pensions and you are asking yourself, “Can I have a SIPP and a workplace pension simultaneously,” the answer is yes, you can.

This Moneyfarm blog has been created to help you understand both types of pension and provide some basic information which will assist you in evaluating whether having both would be a good idea.

Workplace pension vs SIPP

Both of these types of pensions have been designed to provide you with retirement income in addition to the income you may be entitled to receive from the state pension. With a SIPP, you are the sole contributor, whereas, with a workplace pension, your employer also contributes and must do so by law if certain criteria are met.

Can you have a SIPP and a workplace pension open simultaneously? Yes, you can; but if you are wondering, “how much do I need for retirement” and the result indicates that your workplace pension and state pension aren’t going to be enough, you can decide to open a SIPP or another type of personal pension.

So, it’s not a case of workplace pension versus SIPP, but a workplace pension alongside a SIPP.

What is a workplace pension?

Workplace pensions and automatic enrolment were introduced by the UK government in 2012. If you are a worker between 22 and state pension age, and your salary is £10,000 per annum or more, your employer must automatically enrol you in their pension scheme. They are obliged to do this by law. There are some exceptions which you can check out here.

There are two types of workplace pension – defined benefit (DB) and defined contribution (DC). Defined contribution schemes can be in the form of group personal pensions, group stakeholder pensions, or group SIPPs. However, the latter tend only to be offered to senior managers or high earners.

Most workplace pensions are defined contribution pension schemes, also known as money purchase schemes. They are driven by the contributions you and your employer make, plus any applicable tax relief and the performance of the products in which the contributions are invested.

The other type of workplace pension is the defined benefit scheme. This offers a guaranteed sum once you retire, based on both your salary and your length of service. This type of pension is no longer common but is mainly offered only by public sector employers.

In answering “can I have a SIPP and workplace pension” with a yes, we are talking about both types of workplace pension.

What is a Self-Invested Personal Pension (SIPP)?

Whereas a workplace pension gives you little, if any, control over your scheme and pension pot, a SIPP allows you much more freedom. You can choose to invest in a wider range of products, and you can do all the “donkey work” yourself if you have the necessary knowledge and skill. If you don’t, you can choose from several ready-made schemes with different levels of investment products and risk factors.

How to use a SIPP in conjunction with a workplace pension

Taking full advantage of the fact that your employer must contribute a minimum of 3% to your workplace pension fund makes eminent sense. Furthermore, now we’ve confirmed that the answer to “can you have a workplace pension, and a SIPP” is a definite yes; you’ll appreciate that having both types of pensions increases your options in terms of investing for your retirement.

If you do decide to run a SIPP and a workplace pension, you need to be aware that the annual allowance for receiving tax relief on your contributions is £40,000 or 100% of your salary.

The other thing you should be aware of is your pension lifetime allowance. The standard allowance for all pension pots, added together, is £1,073,100. If your pot value grows beyond this threshold, you will pay tax on any surplus growth.

The pension lifetime allowance is calculated using your annual contribution allowance up to the £40,000 ceiling, which qualifies for full tax relief. For example, if you earn £30,000 per annum, as a basic rate taxpayer, you will pay £6,000 per annum in income tax, allowing you to contribute £24,000 per annum free from tax.

Can I transfer my workplace pension to a SIPP?

Now you know the response to “can I have a SIPP and a workplace pension” there is something else you should know. It is a fact that you can transfer a workplace pension pot into a SIPP.

This could be useful if you’ve built up several workplace pension schemes during your working life. Transferring them into a SIPP will make them much easier to keep tabs on and manage.

There is also something called a partial transfer. This is where you transfer your workplace pension funds to a SIPP but leave them open to future contributions. While this is fine for defined contribution schemes, if you have a defined benefit scheme, you may need to be a little more careful. It’s because DB schemes could include particular benefits that you might not want to relinquish.

Pension transfer, whether full or partial, is not exactly rocket science, but you may find it more convenient to work with a financial adviser to ensure you cover all of the pros and cons. It’s something that many people do as part of a 50s retirement savings review.

It’s generally a good idea to speak to an independent financial adviser about pensions, but perhaps even more so when talking about transferring a DB pension to a SIPP. A professional financial adviser should be able to give you pertinent financial advice about any special benefits you could lose out on by transferring your funds.

An adviser will also be able to offer advice about things like how to retire at 55.

Can my employer contribute to my SIPP?

If they wish, employers can contribute to self-invested personal pensions rather than defined contribution workplace pensions, but they are not obliged to do so. If your employer does agree, the contributions will be taken from your gross pay before any income tax or national insurance is deducted. It means their contributions will not qualify for tax relief.

Some employers may be willing to pass on some or all of the money they save from paying reduced NI contributions.

What if you’re self-employed?

You will not be eligible for a workplace pension if you have never been employed. Also, unless you have paid at least 10 years’ National Insurance contributions, you won’t qualify for any state pension. So you can invest in a SIPP as an alternative.

A SIPP is a good choice as a self-employed pension. When you’re your own boss, you can’t always guarantee a steady, regular income. Income inflow can occur and stall depending on opportunity and workload. With a SIPP, you can invest as much as you like when you are able. The only thing to remember is that £40,000 per annum ceiling on pension contributions.

You can even carry up to three years’ worth of allowance forward. So, if you have a quiet year and can’t afford to contribute much, you can catch up next year or the year after, should your income improve.

So in this instance, if you are self-employed, and you are wondering, “can I have a SIPP and a workplace pension” unfortunately, the answer is no, you can only have a SIPP on its own. But you can set up a workplace pension for your business. However, there are exceptions to the rule. Firstly, you can have a workplace pension from an old job before becoming self-employed. Secondly, some pension providers allow you to join their workplace pension as a self-employed or sole director without any employees.

However, opening a private pension as an entrepreneur could be your best option.

Learn more about the Moneyfarm SIPP

Pension savings in this day and age are a must, and when your employer contributes as well as you, it will help to build a bigger pension pot for when you reach retirement age. But if you want greater freedom with the choice of investments, having a private pension or SIPP in addition to your workplace and state pensions could benefit your retirement savings.

As well as offering a wide range of investments, SIPPs also allow you to withdraw lump sums – up to 25% of your pension pot in total, tax-free.

Any sort of investment carries an element of risk. The value of invested funds can fall as well as rise. As regards pensions, it’s advisable to check that any scheme you have is FSCS protected.

Now that we have investigated the “can I have a workplace pension and a SIPP” query, you can find out more about SIPPs by checking out the “What is a SIPP” blog on the Moneyfarm website.

FAQ

What are the advantages of having a SIPP and a workplace pension?

Having a SIPP and a workplace pension means you can have more flexibility and control over your retirement savings. Also, you have a more diversified retirement portfolio with both retirement accounts.

What are the restrictions on contributing to both a SIPP and a workplace pension?

There are no restrictions when it comes to contributing to a SIPP and a workplace pension simultaneously. However, there are limits on how much you can contribute to each pension in a given tax year.

What are the disadvantages of having both a SIPP and a workplace pension?

You may require more time and effort in managing investments held in both a SIPP and a workplace pension. Also, having to pay management fees and other charges for both pensions can eat into your savings. Additionally, you have to be conscious of how much you contribute to each pension so that you don’t exceed annual contribution limits.